Litigation funding proves risky

It’s been a growing trend for some years now—the idea of litigation funding. It’s the practice of hedge funds or individual investors floating the financing for lawsuits for companies or people who are unable to do so, taking the chance that the investors will see a nice return on investment as a result of a settlement or victorious decision.

A recent article in the Wall Street Journal (WSJ) points to two cases that may underscore the growing risks that come along with litigation funding. One such suit involved U.S.-based Excalibur Ventures, which was pursuing more than $1.5 billion in its suit against two oil and gas companies over an interest in oil fields in Iraq. While the investors expected a handsome payout at the end of the three-year litigation, a U.K. judge last week dealt the parties a harsh blow when he dismissed all of Excalibur’s claims. Excalibur, it appears, may end up owing tens of millions of dollars in court costs as a result.

Another case involved a copyright suit involving Walt Disney Co. and comic book characters owned by artist Stan Lee. In that suit, Stan Lee Media claimed Disney made $5.5 billion off of movies and products using Stan Lee’s characters. A federal judge in California dismissed that suit earlier this month, to the dismay of the litigation investors backing Stan Lee Media.

While litigation funding has been growing in popularity over the past few years—there are at least five litigation finance firms worldwide with $100 million or more under management—it hasn’t come without its challenges. And critics believe funding high stakes litigation could give outside investors undue influence over legal decisions and may even encourage frivolous lawsuits—causing litigation costs to skyrocket.